4. Consider the following table: Property Frequency of Severity Exposures Losses

Question

4. Consider the following table: Property Frequency of Severity Exposures Losses per Year ange Damage to Average Expected Standard Severity Loss Deviation 100 automobiles Stolen property Small fires Major fires S0-$20,000 $5,000 $500,000 $100,000 500 100,000 20,000 100,000-s00,000 125,000 125,000 400,000 200 0-2,000 05 500,000-10,000,000 2,000,000 100,000 800,000 Which risks) would a firm be most likely to self insure? Most likely to insure? Please explain your answers. 5. Refer again to the table in question 6. Assume that the total expected loss ($100,000) of stolen property is normally distributed. At the 95% level of confidence, what is the maximum probable loss (MPL) for total expected annual losses for stolen property (the critical statistic for the 95th percentile is 1.645.)? Why is assuming that total losses are normally distributed a reasonable assumption? L expected los Bicopoo IST (uel orlonidence mpce erpectedt value+ l.buso or, MPL 32,900

Explanation / Answer

4.

Table show that the standard deviation and severity of losses for high frequency is low, while the standard deviation is high for low frequency losses with high severity. This relationship is fairly general: Infrequent but potentially large
losses are less predictable and pose greater risk than more frequent, smaller losses.

5.

The normal distributio n are useful for calculating maximum probable loss (value-at-risk) if changes in value (losses) are assumed to benormally distributed and its describe the average loss frommany individual, uncorrelated exposures.

Property Frequency Severity Average Expected Standard Exposures Range Severity Loss Deviation Damage to automobiles Medium $0–$20,000 Low Medium Medium Stolen property High 0–2,000 Low Low Low Small fires Low 100,000–500,000 Medium Low High Major fires Low 500,000–10,000,000 High Low High

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